Raw material inputs in manufacture retain input tax credit status even when they also generate heat during production.

Coal, natural gas, coke and furnace oil used in sponge iron manufacture were treated as raw material inputs where they participated in the manufacturing process as ingredients of the end product. The mere fact that such inputs also generated heat or were consumed during production did not, by itself, convert them into fuel for denying input tax credit. On that footing, the statutory reduction in input tax credit was held unjustified, and the dealer was entitled to full credit without reduction.

---

---

Issues: Whether coal, natural gas, coke and furnace oil used in the manufacture of sponge iron and allied products were raw material inputs so as to entitle the dealer to full input tax credit without reduction under section 11(3)(b)(iii) of the Gujarat Value Added Tax Act, 2003.

Analysis: The disputed inputs were examined in the context of the manufacturing process and the earlier binding view of the Court on the same statutory provision. The Court accepted that where the material participates in the manufacturing activity as an ingredient of the end product, the mere fact that heat is generated or that the material is consumed in the process does not, by itself, convert it into fuel for the purpose of denying credit. Applying that principle, the Court treated the coal and other inputs as raw material used in manufacture and held that the statutory reduction under section 11(3)(b)(iii) was not justified.

Conclusion: The issue was decided in favour of the assessee, and the dealer was held entitled to full input tax credit without the reduction applied by the revenue authorities.

Ratio Decidendi: An input that is an ingredient of the manufacturing process and contributes to the end product does not lose its character as raw material merely because it also generates heat or is consumed during production; therefore, input tax credit cannot be reduced on the footing that such input is fuel unless the statutory condition for reduction is satisfied.

---